Stunned

I am stunned by the amount of fraud, embezzlement and forgery in small businesses perpetrated by their bookkeeper, office manager or trusted employee.

Twenty-nine years ago when I began my career I heard of maybe one company each year that was ripped off by their bookkeeper. Now theft seems common place. Somehow I’m not surprised when I hear about Bernie Madoff and his gargantuan fraud, but I am surprised when it is somebody I know.

Who steals from you? It’s the friend who you hired or the office manager that you have relied on for the last 15 years. It’s the CPA you hired but failed to verify their employment history or check all their references. Many times the people who steal from you are the people you trust the most. These are the people you give the opportunity to steal because you trust them. These are the type of people who return evil for good.

Recently the Association of Certified Fraud Examiners released a report titled Occupational Fraud: A Study of the Impact of an Economic Recession. (Link here to read the report in full.)

The report was based on 507 responses from randomly selected Certified Fraud Examiners distributed during February and March 2009. The results of this survey find that “employees pose the greatest threat to organizational resources in the current economy.” In short, employee embezzlement is the most cited type of fraud, has recently been on the rise and its occurrence is expected to continue to rise.

Employees steal from employers in various ways. Many of these people are innovative. Many of these people are dumb. For example, one office manager paid many of her personal bills with her employer’s checks, recorded the checks on his books as business expenses paid to valid vendors, and then shredded the portion of the bank statement that contained the actual images of the checks to hide her theft. The portion of the bank statement that listed the company’s deposits and checks was kept on file and used to reconcile the bank. This continued over a long time period. Her employer was certain she was trustworthy. He was absolutely shocked when her thievery was discovered. In another instance the bookkeeper just wrote checks to herself and forged the owner’s signature. Her theft was quickly discovered.

How do you protect your business from embezzlement and other forms of theft? Here are a few simple things you can do.

• Keep thieves out of your organization. Before you hire someone, analyze their resume. Unless they are very young, they have a past. Are there any gaps in their employment history? Maybe there were “self-employed.”  Maybe they were self employed for a very good reason. Were they in jail? Drug rehab? Verify an individual’s employment history and call the people who provided their references. You might be surprised what they will say. Pay for a background check. If they are questionable don’t hire them.

• Open and review your bank statements yourself. Look at your signature. Is it really your signature? Do you recognize all the payee’s names as valid vendors? Were there any electronic transfers that you didn’t authorize? Ask questions and let your employees know you are watching.

• If you are big enough to have two or more office workers employed, separate financial duties.

• Prepare accurate financial statements and read them. Sometimes a significant drop in gross profit margin can alert you that something is wrong.

• The best and most comprehensive way to protect yourself is to hire a Certified Public Accountant to review your accounting system specifically to recommend and implement accounting internal controls. Also, make sure you are insured against fraud and embezzlement.

Many times when these thieves are caught they are fired, forced into some type of restitution agreement, and then allowed to go down the street to steal from another employer so they can repay the previous one. For some this acts as incentive to steal, not disincentive. Why? Because the odds are greatly in the thief’s favor that if prosecuted, no jail time will be served and that very few people will ever know what happened. In my opinion they need to be publicly shamed — tarred and feathered. If somebody points a gun at you and steals your money they go to prison. If they steal through deceit you prosecute them, a deal is made, and they just look for another job.

Am I suggesting that you cannot trust any of your employees? No. I believe there are still trustworthy people. But as business owners let’s not tempt our employees. Implement good internal controls and hiring practices. President Ronald Reagan often used the phrase “Trust, but Verify.” It’s still good advice.

David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas at Fayetteville. You can follow his blog at ThePottsReport.com.

Potts can be reached at [email protected]